NEW YORK, Jan 25 (Reuters) - With worries about the
debt crisis in Europe and high unemployment in the United States
drawing the public's attention, the sliding value of corporate
pension funds has largely gone unnoticed.

The problem came into stark relief on Wednesday, when Boeing
Co (BA.N) joined a raft of U.S. companies that have announced
hefty cash injections into underfunded pension plans, including
General Electric Co (GE.N), DuPont (DD.N), Alcoa Inc (AA.N),
Honeywell International Inc (HON.N) and Raytheon Co (RTN.N).

Boeing said it would add $1.5 billion in cash to its pension
plan in 2012, nearly triple the amount it injected in 2011. The
huge jump caused the aircraft maker's full-year earnings
forecast to miss Wall Street estimates. [ID:nL2E8COAWH]

Analysts say pension top-ups will take a big bite out of
corporate earnings this year, due to more rigorous funding
requirements and an erosion of investment returns caused by weak
stock markets and low interest rates.

Of the 341 companies in the S&P 500 index .SPX with
defined benefit pension plans, 97 percent are underfunded,
according to a Credit Suisse analysis. Despite generous
contributions last year, Credit Suisse estimated the plans'
liabilities at $458 billion at the end of 2011, an 86 percent
increase from a year earlier.

"This level of underfunding is something, at least in the
time that we’ve been following the issue, that we haven’t seen,"
said Credit Suisse analyst David Zion, noting that the 2011
estimate is nearly three times larger than underfunding in 2002,
after another U.S. recession.

Large pension contributions are an immediate hit on cash
flow, diverting money from shareholder dividends, stock buybacks
and capital investments. (Click here to see a graphic that
compares a selection of pension obligations against cash
positions: r.reuters.com/zyd36s)

The brunt of the pain will be felt by manufacturers and
other large industrial companies, which have legacy pension
obligations and older workforces, analysts say. Many companies
have done away with pension funds in recent years, moving to
401(k) retirement plans, which are funded by employee
contributions and in many cases a company match.

Like Boeing, AK Steel has disclosed a pension contribution
for 2012. Lockheed said it is fully compliant with government
funding standards. Northrop Grumman declined to comment. The
other companies were not immediately available to comment.

IMPACT ON EMPLOYEES

The U.S. Pension Protection Act requires a company to notify
its employees when their pension fund's asset value dips below
80 percent of obligations. When that happens, companies can only
make lump sum distributions equal to half the benefit owed to
workers. The other half has to be in the form of an annuity.

Plans that are less than 60 percent-funded are frozen and
prevented from making any lump sum payouts. They can only
provide annuities, and workers no longer continue to accrue
benefits until the funding status climbs higher.

While the Pension Protection Act was passed in 2006,
corporate America persuaded lawmakers to delay implementing
major aspects of the law during the recession. These kick in
this year.

Many companies try to decrease the volatility of their
pension plans by changing asset allocation or culling headcount
through offering a lump sum payment.

More than half of plans are likely to offer lump sum
distributions over the next two years, according to a recent
survey of senior-level financial executives by Mercer and CFO
Research Services.

“We’re likely to continue to see corporations attempting in
one form or another to essentially buy out some employees from
these defined benefit plans,” said Robert Strong, a business
professor at the University of Maine .

OPERATION TWIST

The U.S. stock market ended last year virtually unchanged,
after a volatile 12 months that produced monthly performances
ranging from gains of nearly 11 percent and declines of more
than 7 percent in the S&P 500 index.

Interest rates were pressured by the U.S. Federal Reserve's
stimulus program last summer, known as "Operation Twist." The
yield on U.S. 30-year Treasuries dropped 34 percent in 2011 to
4.39 percent, while the 10-year note fell 44 percent to 1.89
percent.

Fed Chairman Ben Bernanke said on Wednesday the U.S. central
bank would likely keep interest rates near zero until at least
late 2014. [ID:nL2E8CODR8]

Rock bottom interest rates force a company to have more cash
on hand to meet payments since its money cannot earn as much in
future interest.

"For years now, we haven't had to make a contribution," said
Nick Fanadakis, DuPont's chief financial officer, after the
chemical giant announced a $500 million cash injection into its
U.S. pension fund. "The return on assets was able to fund the
pension plan."

The interest rate DuPont uses to calculate returns, known as
the discount rate, fell to 4.5 percent in 2011 from 5.5 percent
in 2010, Fanadakis said.

THE UPSIDE

Besides meeting regulations that require companies to shore
up underfunded pension plans, companies have other incentives to
do so. For example, UBS analysts point to a peculiarity in
accounting rules that let companies forecast pension performance
using long-term rates of return, which are currently higher than
actual market results. Any shortfall in the return can
then be amortized over five years. (here)

Nor is it necessarily true that a cash infusion into a
pension fund is a bad thing. Pension funds invest in stocks,
bonds and other assets that can help the economy, said Jeremy
Bulow, a professor at Stanford Business School.

"This money is going into the pension fund, which is being
used to invest in corporate America, as opposed to going into
whatever else the company might use it for," he said. "It’s not
really clear to me that takes away from investment in the
economy.”

Regardless, large payouts will be the rule, not the
exception, for many companies this year.

Mark Oline, an analyst with Fitch Ratings, said companies
that have dangerously underfunded pensions could be at risk of a
ratings downgrade.

“For us, a strategy of hoping for higher interest rates or
higher asset returns is not a strategy," said Oline. "Higher
contributions are required."

(C) Reuters 2011 All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.